2010-10-25

Beggar thy Neighbor or good fences make good neighbors. Fatboy reports, you decide.

"The Dollar is our Currency, but Your Problem"
US Treasury secretary John Connally to a delegation of European finance ministers in 1971

"I got some ideas on Mr. Connally. He ain't never done nothin' but get shot in Dallas."
Bob Bulloch Texas Secretary of State 1972

"Now, in my State of the Union address I set a goal of doubling America’s exports over the next five years."
Barack Obama March 11, 2010

Beggar-thy-neighbor:
A devaluation that is designed to cheapen a nation's currency and thereby increase its exports at other countries' expense and reduce imports. Such devaluations often lead to trade wars.

"There is the possibility... that after the rate of interest has fallen to a certain level, liquidity preference is virtually absolute in the sense that almost everyone prefers cash to holding a debt at so low a rate of interest. In this event, the monetary authority would have lost effective control."

John Maynard Keynes, The General Theory

Quantitative easing, currency wars, protectionism and beggar-thy-neighbor are all one in the same, joined at the hip. The printing of currency devalues that currency which then decreases the cost of that nations exports. If a currency loses value another currency must then gain value. The nation or nations that see their currency gain in value obviously see their exports increase in price. This then could lead to tariffs on imports and other forms of protectionism. As seen here: "Many other currencies, especially in Asia and in emerging markets like Brazil, are soaring as a result of the dollar’s fall. Those nations’ domestic economies are attracting floods of speculative capital seeking higher interest rates and are at risk of overheating. The dollar’s decline is being driven by what everyone in global markets is now expecting: another round of so-called quantitative easing by the United States. In the next few weeks, the Federal Reserve is expected to inject vast sums of money into the economy in another attempt to spur growth.In Brazil, officials have been especially critical of United States policy. On Sept. 27, its finance minister, Guido Mantega, first described the currency tensions as practically an “exchange war, a trade war.” This week, Brazil’s central bank governor said that Washington’s expected monetary stimulus “creates serious distortions.” And "Some countries have gone further than merely criticizing the United States, embracing forms of capital controls to reduce incoming short-term investment. Brazil is increasing the tax on money flooding into its bonds. South Korea cited the need to check speculative foreign capital inflows."http://www.nytimes.com/2010/10/21/business/global/21dollar.html?_r=1&hpSo why would Bernanke embark on this seemingly slippery slope? It appears that is a good question. One angle is as follows: "The protectionist cheap-dollar policy has an important domestic political function as well. It aims to divert growing public anger over the refusal of the government to provide jobs or serious relief to the unemployed away from the Obama administration and Congress and toward China and “foreigners” more generally. Among its most enthusiastic supporters is the trade union bureaucracy."http://www.wsws.org/articles/2010/oct2010/econ-o18.shtmlanother: " a weaker USD is going to be both the natural and the intended consequence of the coming bout of additional QE by the Fed, and it will have a strong collateral effect on the already weakened and export dependent economies of the EuroArea and Japan...My feeling is that the US administration have decided to reduce the unemployment rate, and close the current account deficit, and that the only way to achieve this is to force the value of the dollar down. That way it will be US factories rather than German or Japanese ones that are humming to the sound of the new orders which come in from all that flourishing emerging market demand."http://edwardhughtoo.blogspot.com/2010/10/unusual-but-interesting-argument-which.htmlyet another: "Central bankers around the globe are trying to give their economies an extra jolt, such as slashing interest rates and even taking the unusual route of essentially printing vast amounts of cash, which U.S. Federal Reserve Chairman Ben Bernanke last week focused on as an option to boost the economy.Whatever the intentions, all these actions end up weakening currencies. More important, such "beggar-thy-neighbor" interest rate policies tend to encourage a domino effect: The fall of one currency leads to the irritating rise of another, and so on."http://finance.fortune.cnn.com/2010/10/18/what-exactly-is-a-currency-war/The highly regarded conservative investment Fund manager John Hussman compares Bernanke's actions to those of a reckless action hero when he calls him "Dirty Ben" and equates Bernake's policies to Dirty Ben pointing his pistol at the world and threatening to shoot them with his last bullet. That is if he actually has another bullet. "I know what you're thinking. 'Did he fire six shots, or only five?' Well, to tell you the truth, in all this excitement I kind of lost track myself... You've gotta ask yourself one question. Do I feel lucky? Well, do ya punk?"httwww.hussmanfunds.com/wmc/wmc101018.htmp://One more: "one salutary effect of this dubious proposition, according to chief apothecary Brian Sack, is that risk asset values are likely to be elevated to levels “higher than they would otherwise” reach — thereby encouraging consumers to go back to their former spending ways owing to the illusion of higher net worth, as conjured by the Fed." Fatboy here. Did you get that? Brian Sack. an executive vice-president at the FRBNY supports this action because it will artificially raise risk assets values thereby encouraging consumers to spend that artificially raised value. Sounds like he's attempting to recreate the US housing bubble but only risk assets. Bizarre.http://www.marketwatch.com/story/trillion-dollar-deficits-dont-matter-2010-10-13Is the rest of the planet going to roll over and cede to the demands of the US Federal reserve? It appears not: "Financial Times on Friday gave some indication of growing anger within Europe over US monetary policy, quoting a “senior European policymaker” as calling the Fed’s policy “irresponsible.” The article cited Russian Finance Minister Alexei Kudrin as saying one reason for the exchange rate turmoil “is the stimulating monetary policy of some developed countries, above all the United States, which are trying to solve their structural problems in this way.”The nation of Brazil has seen their currency appreciate rapidly and their exports suffer:"...the Brazilian finance minister warned of the outbreak of a global currency war and earlier this month his government announced the doubling of a tax on foreign purchases of Brazilian bonds in an attempt to stem the inrush of capital and the relative rise of the nation’s currency, the real.This past week, Thailand took similar steps, announcing a 15 percent withholding tax on the interest payments and capital gains earned by foreign investors in Thai bonds, in an attempt to arrest the appreciation of the baht, which has already risen by 10 percent against the dollar this year."http://www.wsws.org/articles/2010/oct2010/econ-o18.shtmlheBRASILIA, Oct 18 (Reuters) - Brazil's top economic officials will not be attending meetings of Group of 20 finance ministers and central bank governors in South Korea this week, the finance ministry and central bank press offices said on Monday.Finance Minister Guido Mantega canceled his trip because of currency issueshttp://www.reuters.com/article/idUSN1822416420101018SAO PAULO (MNI) - Brazil Finance Minister Guido Mantega announced Monday night the government is increasing the IOF financial tax on foreign investment in domestic fixed income to 6% from 4%, and the tax on margin deposits in the futures markets to 6% from 0.38%, but only for foreigners.http://imarketnews.com/node/20965Russian deputy finance minister Dimitry Pankin was also skeptical about the U.S. initiative."The United States will try to put the question of exchange rates and current account balances at the top of the agenda, to try to press China to make some commitments on this issue. In my view it is unlikely that they will succeed," Pankin saidPankin criticized Washington for piling pressure on emerging markets to lead a re-balancing when it was loose U.S. policy settings that were sending capital pouring into developing economies, generating pressure for their exchange rates to rise."We think that such policies will not come to any good," he said. Things would not turn out well unless the United States cut its budget deficit and tightened monetary policy, he added.http://www.reuters.com/article/idUSTRE69K0Q720101021?pageNumber=2Turkey's not on board either: "The United States is hoping it can rely on Turkey, an ally and NATO member, to support the upcoming discussion, but Turkey's Deputy Prime Minister Babacan said there are national interests to consider. His country is nurturing a trade relationship with China, which he praised in a recent interview for its "long-term vision," compared with the shorter-term interests he feels are driving policy in the developed world. In the argument over exchange rates and trade, he said that "if you say to a country, 'Give me some of your money,' that doesn't work." He argued that the major developed countries were not acting forcefully enough on their own debt and other budget issues that will ultimately affect Turkey and other nations that depend on consumer markets in Europe and the United States. "In the major developed economies, there are weak governments. . . . We don't know if decisions can be made," Babacan said. "If I was in charge of the U.S. economy, I'd talk more about deficits and debt."http://www.washingtonpost.com/wp-dyn/content/article/2010/10/21/AR2010102103220_2.html?hpid=topnewsBut surely it is only Asians and other emerging market officials that don't support Bernanke's Quantitative Easing Part 2. Right? Wrong. L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City adds: "QE2 does not represent a solution to our current quagmire. No, this Titanic is still headed underwater. The sooner that the Obama administration recognizes that what we need is jobs, more jobs, and mortgage relief, the sooner we can get this ship afloat."

http://www.creditwritedowns.com/2010/10/qe2-wont-save-our-sinking-ship.html#ixzzWillem Buiter the chief economist at Citigroup has very strong opinions on this matter comparing Bernanke to a coward thief in the night:" Buiter calls out the Treasury on its hypocrisy of condemning others of performing currency manipulation, when the Fed's QE2 threat is the biggest FX intervention move ever, and furthermore, at least others retain some dignity by doing their operations in the open. While the Fed, like a coward thief in the night (stealing from the middle class) can only operate by undermining the credibility of its currency by monetizations."http://www.zerohedge.com/article/willem-buiter-us-must-prepare-savage-austerityRon Reagan's OMB director David Stockman chimes in: "In the olden times — say three years ago — the idea of 100% debt monetization would have been roundly denounced as banana republic finance. No more. Earlier this week, William Dudley, who occupies the Goldman Sachs permanent seat on the Fed’s Open Market Committee, helpfully clarified that the new-age Fed should be judged by what’s in its heart, not what’s on its balance sheet. He said: “I am mindful of concerns… that [the Fed’s actions] could be interpreted as a policy of monetizing the federal debt. However, I regard this view to be fundamentally mistaken. It misses the point of what would be motivating the Federal Reserve.”http://www.marketwatch.com/story/trillion-dollar-deficits-dont-matter-2010-10-13Germany's finance minister accuses the US of manipulating the dollar's value. The same thing the US accuses China of regarding the yuan:

German Economy Minister Rainer Bruederle on Saturday took issue with what he called a U.S. policy of increasing liquidity, saying it indirectly manipulated exchange rates:

"I tried to make clear in my contribution to the discussion that I regard that as the wrong way to go," he said.

"An excessive, permanent increase in money is, in my view, an indirect manipulation of the (foreign exchange) rate." http://www.cnbc.com//id/39808247Charles Plosser, president of the Phiadelphia Federal Reserve Bank worries about the Fed losing credibility. Too late for that worry in my book, but anyway Mr. Plosser adds: "Monetary policy is not a magic elixir that can solve every economic ill," Plosser said in a speech in Vineland, N.J. He said he doubted that more quantitative easing would impact the near-term outlook for employment and the Fed might lose credibility if it promised such a result.http://www.marketwatch.com/story/feds-plosser-against-second-round-of-bond-buys-2010-09-29-1230120Richard Fisher, president of the Dallas Federal Reserve Bank has dark thoughts regarding more Fed easing fearing it may be causing asset bubbles. Which is what Brian Sack of the FRBNY was quoted earlier as saying creating artificial prices, asset bubbles, was his desired goal: "In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places"http://pragcap.com/unintended-consequences-qe2Thomas Hoenig, president of the Kansas City Federal Reserve Bank and Fatboy's favorite Fed president, has the audacity to claim, among other things, the Fed's broader responsibility is to the general public, not the financial markets: "We have to recognize that QE2, while a possibility, is not necessarily what we want to do given the benefits versus the risks," Hoenig told the National Association of Business Economics. "At this point, with a modest recovery under way and inflation low and stable, I believe the economy would be better served by beginning to normalize monetary policy....We are not an island. We affect other countries, they know that and they react to us, and therefore we are affected by our actions as it comes back to us...There simply is no strong evidence the additional liquidity would be particularly effective in spurring new investment, accelerating consumption, or cushioning or accelerating the deleveraging that is hopefully winding down. http://www.reuters.com/article/idUSTRE69B3UT20101012 One more from Hoenig: Monetary policy is about an environment that’s supposed to be stable. "When you try to use it in a way that floods the market with liquidity, you can in fact get very bad outcomes.” Kansas City Federal Reserve President Thomas Hoenig, October 21, 2010http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10452More from John Hussman. I suggest you read the link in it's entirety: "In short, further attempts at QE are likely to have little effect in provoking increased economic activity or employment. This is not because QE would fail to affect interest rates and reserves. Rather, this policy will be ineffective because it will relax constraints that are not binding in the first place." and: "Despite the probable lack of measurable benefits, further QE poses significant risks. It has already triggered a steep decline in the exchange value of the U.S. dollar, and threatens a destabilization of international economic activity, a loss of confidence, and the creation of a "boom-bust" cycle threatening to choke off any economic recovery that does emerge." More from Hussman: " This suggests that provoking further dollar depreciation is likely to have negative effects on the global economy, owing to a shift away from imports, but with few positive effects for U.S. economic activity. Indeed, a further depreciation would unnecessarily create a negative wealth effect for U.S. consumers facing higher prices for imported goods and services. Any improvement in the trade deficit would be largely offset by downward pressure on U.S. consumption....Meanwhile, the best course for the Federal Reserve is to identify specific constraints within the U.S. banking system that create barriers to sound lending, and to formulate specific policies to relieve those constraints. Throwing a trillion U.S. dollars against the wall to see what sticks is not sound monetary policy." Finally Dr. Hussman agrees with the president of the Philadelphia Federal Reserve Bank regarding the risk of the Federal Reserve losing it's credibility: "By pursuing a policy that relaxes constraints that are not even binding, depresses the U.S. dollar, threatens to destabilize international economic activity, encourages a "boom-bust" cycle, provokes commodity hoarding, and pops off the Fed's last round of ammunition absent an immediate crisis, the Fed threatens to damage not only the U.S. economy, but its own credibility."http://www.hussmanfunds.com/wmc/wmc101018.htmIn the entirety of my many hours of reading on this subject, I have yet to come across anyone outside of the US Federal Reserve or Wall St. that supports another round of Quantitative Easing aka money printing. No foreign central bankers, finance ministers, allies or enemies alike. Not a one. As the previous quote from Kansas City Fed president said: "We are not an island. We affect other countries, they know that and they react to us, and therefore we are affected by our actions as it comes back to us." The reactions of other countries will take the shape of "good fences make good neighbors" policies. China’s central bank governor, Zhou Xiaochuan, charged that expectations that the US Federal Reserve would pump yet more dollars into the markets through quantitative easing were compounding imbalances and swamping emerging economies with destabilizing capital inflows. Brazil's government announced the doubling of a tax on foreign purchases of Brazilian bonds in an attempt to stem the inrush of capital and the relative rise of the nation’s currency, the real. It is also rumored that Brazil has added a surcharge on all steel imports. Also Brazil Finance Minister Guido Mantega announced the government is increasing the IOF financial tax on foreign investment in domestic fixed income to 6% from 4%, and the tax on margin deposits in the futures markets to 6% from 0.38%, but only for foreigners."The intention is to reduce profitability on the futures market for foreigners," he said, adding "we want to diminish the appetite especially of short-term investors." And On 27 September 2010, the Brazilian Finance Minister Guido Mantega stated the obvious speaking of an “international currency war” as governments around the globe compete to lower their exchange rates to boost competitiveness. This past week, Thailand took similar steps, announcing a 15 percent withholding tax on the interest payments and capital gains earned by foreign investors in Thai bonds, in an attempt to arrest the appreciation of tlhe baht, which has already risen by 10 percent against the dollar this year. Columbia feels the need to erect fences: "Colombia will take measures “next week” to ease the peso’s rally after “carefully” studying a “complicated” situation, President Juan Manuel Santos said in comments posted on the presidential website. And Columbia says it can and will do more as needed: "The central bank said Sept. 15 it will buy a minimum of $20 million daily for at least four months. While the bank has maintained that average through auctions, central bank chief Jose Dario Uribe has said Banco de la Republica can buy “much more” or extend purchases beyond the scheduled four months."http://www.bloomberg.com/news/2010-10-23/colombia-will-take-measures-to-ease-peso-s-rally-next-week-santos-says.htmlWe are in the beginning stages of some type of global currency dust up. The only thing that is in question is how severe the dust up will be. Odds are very much in favor of Bernanke announcing another round of money printing next week. Though history doesn't repeat itself, it does rhyme. On the heels of the QE2 announcement we will see reactions from around the globe. Capital controls, currency interventions and probably trade tariffs. After those actions we'll undoubtedly hear US politicians and other government officials pointing their fingers at those nations that react to QE2 with actions of their own being labeled as protectionists, bad actors and being undemocratic. As you hear this, remember what Kansas City Federal Reserve Bank president Hoening said "We are not an island. We affect other countries, they know that and they react to us, and therefore we are affected by our actions as it comes back to us." Being the worlds only military super power and printer of the world's sole reserve currency should be looked upon as a privilege, not a right. If only the leaders of the US agreed.